Saturday, June 6, 2009

ELSS Mutual Funds - Long Term Investing & Income Tax 80C @ It's Best

An equity-linked savings scheme (ELSS) is a variety of diversified equity fund. An investment in an ELSS is taxdeductible under Section 80C of the Income Tax Act.An ELSS is like any other equity fund. However, the lock-in period is three years. It comes with all the usual trappings of an equity fund, including the choice between dividend and growth options, and systematic investment plans (SIP).

Under the IT Act, investors investing in an ELSS can claim benefits under Section 80C. The limit under this Section is Rs 1 lakh. The dividends earned in an ELSS are tax-free. The returns at maturity are also tax-free.

Among all tax-saving options an ELSS stands out. However, in the present conditions, the returns have not been as good as in the past. The stock markets have given huge negative returns in the last year and all equity schemes, including tax-saving ones, were down.

If you have a 3-5 year timeframe, you should go for an ELSS. The market may be down in the short term, but you still have the potential to earn better returns over a long term.

There are many advantages of an ELSS tax-saving option. The SIP option would help you start tax planning from the beginning of the financial year. It also imparts a certain financial discipline in investors.

You may expect better returns vis-a-vis other savings instruments that offer a fixed rate of return. The returns from an ELSS may vary. Stocks have the potential to out-perform all other asset classes in the long run.

An ELSS also beats other equity mutual fund schemes, as it has a mandatory three-year lock-in period. This gives it the freedom to invest in stocks with huge potential and wait to unlock the value.

The amount to be invested in an ELSS should be in multiples of Rs 500 with a minimum of Rs 500. The fund should allot the units in respect of all complete applications , made in the specified form, not later than March 31 every year. Further, the plan should be open for a minimum period three months.

Investments in the plan will have to be kept for a minimum period of three years from the date of allotment of units. After the period of three years, the investor will have the option to tender the units to the fund for repurchase.

In case of death of the investor, the nominee or legal heir will be able to withdraw the investment only after the completion of one year from the date of allotment of the units to the investor or anytime later.

The units issued under the plan can be transferred, assigned or pledged after three years of its issue

An investment made in any plan will be acknowledged by the fund through a certificate of investment or a statement of account .

A plan operated by the fund would be terminated at the close of the tenth year from the year in which the allotment of units is made under the plan.

If 90 percent or more of the units under any plan are repurchased before completion of 10 years, the fund may terminate that plan even before the stipulated period of 10 years and redeem the outstanding units at the final repurchase price to be fixed by them.

The funds collected by the fund are invested in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies.

Investments may also be made in partly convertible issues of debentures and bonds including those issued on rights basis subject to the condition that the non-convertible portion of the debentures so acquired will be disinvested within a period of one year.

The fund needs to ensure the funds of the plan remain invested to the extent of at least 80 percent in securities as specified.

The investments should be made within a period of six months from the date of closure of the plan every year.

Pending investment of funds of a plan, the fund may invest the funds in short-term money market instruments or other liquid instruments.

After three years of the date of allotment of the units, the fund may hold up to 20 percent of net assets of the plan in short-term money market instruments and other liquid instruments to enable them to redeem investments of those unit holders who seek to tender the units for repurchase.

ELSS offers an excellent mode of investing in the equity markets and saving on tax. As the investments are locked in for a period of three years, the returns are also good in these schemes.Further, considering the tax advantages, the yield on investments is generally high.

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